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These Underdogs Are No Dogs

Like the smart hedge fund operators, these CAPS investors bet against a stock -- and won big.

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest ones in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, we also have investors who find the chinks in a company's armor and correctly call its fall. Our "Underdogs" have earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market. However, we're going to focus on the stocks these top members expect will outperform the market. If these CAPS investors have scored big by correctly predicting which stocks will fail, it may be worth our while to see which others they think will succeed.

Not every short sale goes as planned, making shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. So don't use this as a list of stocks to sell or buy -- just the launching pad for further research.

Underdogs still wag their tailsTax prep giant H&R Block recently reported better than expected results for the 2011 first quarter, with losses narrowing even though revenues fell slightly. But there seems to be problems lurking in the bushes, despite what management says.

During the housing boom, everyone thought they were a mortgage broker. E*TRADE Financial(Nasdaq: ETFC) got in on the act and so did H&R Block. When the market crumbled, the core operations of these businesses were dragged down along with the mortgage operations. E*TRADE eventually jettisoned that line, as did H&R Block, but the problems linger.

The tax prep specialist was able to reduce losses realized in its discontinued mortgage business by lowering its loan loss reserves, because its mortgage buyback liability was within the range of expectations. Yet take a look at its non-performing loans: While mortgages delinquent for 60 days or more stayed relatively level, the number of mortgage holders newly behind on their payments -- 30 to 59 days overdue -- rose 280% since April. That situation doesn't seem to fit with reducing your reserves.

Many banks are being accused of engaging in "pretend-and-extend" schemes to make their balance sheets look better than they are, and in the process they're using previously high loan-loss reserves to manage earnings. By releasing funds back into their financial statements, their earnings can look better even though high risk remains. Investors might want to keep an eye on H&R Block's mortgages, too.

A dose of realityIn Greece, despite lower revenues for its coffers, officials say there won't be any further austerity measures. Yet in return for loans that bailed it out, the International Monetary Fund and the European Union require it to cut its budget deficit from 13.6% of gross domestic product to 8.1% by 2013. With the lack of will to implement tough measures (a common trait among politicians), it seems more likely that eventually there might be a default. National Bank of Greece has tried to downplay that likelihood, but the market isn't so sure and the institution's stock has paid the price.

Getting schooledWhen the recession hit, for-profit education was one of the few sectors expected to benefit. Those who lost their jobs were hitting the books to build their resumes up with skills they'd use to land their next gig. It shouldn't have been a surprise that someone without an income also might default on loans.

The Education Department said the default rate at for-profit schools rose to 11.6% from 11% a year ago for students who were supposed to begin repaying loans in the 2008 fiscal year (the most current data available). Naturally, shares of Corinthian Colleges, Apollo Group(Nasdaq: APOL), and DeVry(NYSE: DV) all rose on the news. That's because the increase wasn't as high as analysts had expected, but that was two years ago, and the recession has only worsened.

Yet it's also encouraging critics to call for further regulation of the industry, which it says is saddling students with more debt than they can afford. The industry has also come under renewed scrutiny for its recruiting practices, and while Apollo bore the brunt of the review, Corinthian and even the Washington Post's (NYSE: WPO) Kaplan University were cited.

CAPS All-Star TDRH says the saber rattling by industry critics provides a good entry point into Corinthian shares, while TraderMikeSays writes that there are short-term opportunities.

Turned-around for just an instant, now headed lower again. Look for it to test support again, I would buy this one below $4.50-4.75, and place a stop at around $4.25. If it goes that low again, jump in, but be ready to get-out if the trade doesn't work. The curve should be flattening soon, but it really needs to break above the 20-day to get the party started...

There's no need to fear ...Underdogs often shine brightest with their backs against the wall. Still, it takes more than a few All-Star picks and a quick paragraph to make buy or sell decisions. Start your own research on these stocks on Motley Fool CAPS, where your opinion can still save the day. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has a disclosure policy.

Fool contributorRich Dupreydoes not have a financial position in any of the stocks mentioned in this article. You can seehis holdings.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.